The figures speak for themselves. At the moment, Snap looks much more like Twitter than Facebook. While the latter is trying to rival Google in terms of share of the rising online global ad spend, Snap is in a much lower league.
WPP, the world’s biggest media buyer, said that in 2016 clients spent about $1.7 billion advertising on Facebook, compared to $5 billion they spent on Google ads. Spending on Snapchat ads equalled just $90 million.
Twitter is struggling, despite the publicity it is getting from the new US president Donald Trump’s decision to use it as his main communication channel. The company is expected to report a 4.2% increase in the fourth-quarter revenue, but a 25% decline in adjusted net income when it reports in a few days. What's the problem? Competition from Snapchat and Facebook’s Instagram.
That’s not to say advertisers aren’t interested in the young clientele using Snapchat, and the growth potential for the company may be higher than for Google or Facebook. However, the uncertain revenue growth in the future does not support a valuation of up to 60 times current sales, versus Facebook at 14 times sales and Twitter at four times sales.
Snap is already facing tougher competition than it did just a year ago, as Facebook and its Instagram platform copy many features that Snapchat pioneered. Its costs are already higher than its revenues, and they will have to rise further if the company continues down the hardware path.
Amid the risk factors that Snap highlighted in its IPO prospectus is the warning that it ‘may never achieve or maintain profitability.’
At the first glance, concerns about valuation and voting rights would appear to make Snap’s IPO pretty unattractive. But this is a major US tech company, and one with huge growth potential if its management gets it right. There’s lots of hype to go with the listing, and shares may well go higher in the early days. What happens after that is anyone’s guess at this stage.
Remember, Twitter’s shares soared in the first six weeks after its listing, reaching a peak of $69 a share before going on a steady decline to the roughly $17 a share they now trade at. Facebook, on the other hand, fell in the months following its 2012 IPO, before going on a four-year uptrend that’s ongoing and has left the stock at about $130 a share.
Snap’s shares, once they start trading, have another supportive factor. Facebook covets Snapchat. It last tried to buy Snapchat for $3 billion back in November 2013, and it has copied some of Snapchat’s features to its own services. It could be that Facebook, and possibly Google, may yet decide to try and buy Snap. That will underpin the share price.
